*SGVFS014558* INDEPENDENT AUDITORS REPORT

Transcription

1 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Tel: (632) Fax: (632) ey.com/ph BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No FR-4 (Group A), November 10, 2015, valid until November 9, 2018 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Philex Mining Corporation Philex Building 27 Brixton Street Pasig City, Metro Manila We have audited the accompanying consolidated financial statements of Philex Mining Corporation and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2015 and 2014, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the Philippines applied on the basis described in Note 2 to the consolidated financial statements, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. A member firm of Ernst & Young Global Limited

2 - 2 - Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Philex Mining Corporation and its subsidiaries as at December 31, 2015 and 2014, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2015 in accordance with accounting principles generally accepted in the Philippines applied on the basis described in Note 2 to the consolidated financial statements. SYCIP GORRES VELAYO & CO. Jose Pepito E. Zabat III Partner CPA Certificate No SEC Accreditation No AR-3 (Group A), May 1, 2015, valid until April 30, 2018 Tax Identification No BIR Accreditation No , February 27, 2015, valid until February 26, 2018 PTR No , January 4, 2016, Makati City February 24, 2016 A member firm of Ernst & Young Global Limited

3 PHILEX MINING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Thousands, Except Par Value Per Share) December ASSETS Current Assets Cash and cash equivalents (Note 6) P=1,008,686 P=5,231,892 Accounts receivable (Notes 7, 21 and 23) 897,479 1,055,864 Inventories (Note 8) 1,886,544 1,858,220 Other current assets (Note 9) 1,478,748 1,384,507 Total Current Assets 5,271,457 9,530,483 Noncurrent Assets Property, plant and equipment (Note 10) 6,828,052 7,138,912 Available-for-sale (AFS) financial assets (Notes 11 and 21) 106, ,681 Goodwill (Note 4) 1,238,583 1,238,583 Investment in an associate (Note 12) 659,408 Deferred income tax assets - net (Note 25) 5,992 8,224 Deferred exploration costs and other noncurrent assets (Notes 1, 13, 14, 18 and 19) 29,438,845 25,817,465 Total Noncurrent Assets 38,277,567 35,109,865 TOTAL ASSETS P=43,549,024 P=44,640,348 LIABILITIES AND EQUITY Current Liabilities Loans payable (Note 14) P=3,317,730 P=4,307,720 Accounts payable and accrued liabilities (Note 15) 1,448,445 1,795,755 Income tax payable (Note 25) 13,014 47,423 Dividends payable (Note 26) 479, ,818 Provisions and subscriptions payable (Notes 1 and 31) 456, ,102 Total Current Liabilities 5,714,884 7,522,818 Noncurrent Liabilities Deferred income tax liabilities - net (Notes 4 and 25) 3,939,160 3,859,141 Loans and bonds payable (Note 14) 6,259,063 5,947,366 Pension obligation (Note 19) 21,968 43,585 Provision for losses and mine rehabilitation costs (Notes 10 and 31) 330, ,618 Total Noncurrent Liabilities 10,550,238 10,075,710 Total Liabilities 16,265,122 17,598,528 Equity Attributable to Equity Holders of the Parent Company Capital stock - P=1 par value (Note 26) 4,940,399 4,940,399 Additional paid-in capital 1,142,722 1,117,627 Retained earnings (Note 26) Unappropriated 5,496,271 4,712,032 Appropriated 10,000,000 10,000,000 Net unrealized loss on AFS financial assets (Notes 11 and 25) (1,022) (64,010) Equity conversion option (Note 14) 1,225,518 1,225,518 Cumulative translation adjustments (Notes 21 and 25) 124,334 37,370 Net revaluation surplus (Note 4) 1,611,397 1,611,397 Effect of transactions with non-controlling interests (Note 2) 23,164 19,084 24,562,783 23,599,417 Non-controlling interests (Note 26) 2,721,119 3,442,403 Total Equity 27,283,902 27,041,820 TOTAL LIABILITIES AND EQUITY P=43,549,024 P=44,640,348 See accompanying Notes to Consolidated Financial Statements.

4 PHILEX MINING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except Earnings per Share) Years Ended December REVENUE (Notes 7 and 21) Gold P=5,669,860 P=5,889,107 P=5,581,587 Copper 3,449,799 4,615,092 4,579,757 Silver 69,723 78,161 82,063 9,189,382 10,582,360 10,243,407 Less smelting charges 836, , ,536 8,352,785 9,732,523 9,583,871 Petroleum and others 172, , ,385 8,525,035 10,048,240 9,802,256 COSTS AND EXPENSES Mining and milling costs (including depletion and depreciation) (Note 16) 6,088,040 6,719,928 5,457,881 General and administrative expenses (Note 16) 628, ,001 1,311,059 Excise taxes and royalties (Note 16) 436, , ,522 Petroleum and other production costs 97, , ,665 Handling, hauling and storage 72,312 88,417 69,003 7,323,777 8,414,798 7,480,130 OTHER INCOME (CHARGES) Foreign exchange losses - net (Note 21) (132,391) (56,374) (173,972) Gain on disposal of AFS financial assets (Note 11) 107,088 26,867 Impairment loss on deferred exploration costs - net (Notes 8, 10 and 13) (41,218) (569,926) (297,585) Share in net loss of an associate (Note 12) (13,200) Interest income (Note 6) 11,529 16,952 26,060 Interest expense (Notes 10 and 14) (354,461) (416,360) Gain on sale of property, plant and equipment (Note 10) 764,685 Reorganization costs (Note 31) (394,154) Others - net (Notes 1, 7, 11, 13, 21 and 32) 9,165 14,118 (412,084) (59,027) (579,160) (1,247,074) INCOME BEFORE INCOME TAX 1,142,231 1,054,282 1,075,052 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 25) Current 245, , ,703 Deferred 121,030 (70,147) 506, , , ,657 NET INCOME P=775,635 P=702,845 P=312,395 Net Income (Loss) Attributable to: Equity holders of the Parent Company P=896,181 P=1,005,552 P=341,932 Non-controlling interests (Note 26) (120,546) (302,707) (29,537) P=775,635 P=702,845 P=312,395 Basic Earnings Per Share (Note 28) P=0.181 P=0.204 P=0.069 Diluted Earnings Per Share (Note 28) P=0.181 P=0.204 P=0.069 See accompanying Notes to Consolidated Financial Statements.

5 PHILEX MINING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Years Ended December NET INCOME P=775,635 P=702,845 P=312,395 OTHER COMPREHENSIVE INCOME (LOSS) Items to be reclassified to profit or loss in subsequent periods: Reversal of fair value changes in AFS investment subsequently accounted for as an associate (Note 11) 193,099 Gain on translation of foreign subsidiaries 147,278 7, ,071 Realized gain on sale of AFS financial assets (Note 11) (107,088) Unrealized loss on AFS financial assets - net of related deferred income tax (Note 11) (23,023) (68,699) (1,620,140) Realized loss on fair value of hedging instruments transferred to the consolidated statements of income - net of related deferred income tax (Note 21) (7,766) Gain on fair value of derivative (Note 21) 7,766 Realized loss on impairment of AFS investments (Note 11) 1,006,508 Realized loss on sale of AFS financial assets (Note 11) 30, ,500 (53,278) (373,076) Items not to be reclassified to profit or loss in subsequent periods: Remeasurement gains (losses) on pension obligation plans - net of income tax effect (Note 19) (15,621) (28,038) 207,671 TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 186,879 (81,316) (165,405) TOTAL COMPREHENSIVE INCOME P=962,514 P=621,529 P=146,990 Total Comprehensive Income (Loss) Attributable to: Equity holders of the Parent Company P=1,033,019 P=921,823 P=21,275 Non-controlling interests (Note 26) (70,505) (300,294) 125,715 P=962,514 P=621,529 P=146,990 See accompanying Notes to Consolidated Financial Statements.

6 PHILEX MINING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 (Amounts in Thousands) Equity Attributable to Equity Holders of the Parent Company Capital Stock (Note 26) Additional Paid-In Capital Unappropriated Retained Earnings (Note 26) Appropriated Net Unrealized Gain (Loss) on AFS Financial Assets (Note 11) Cumulative Translation Adjustments (Note 21) Net Revaluation Surplus (Note 4) Effect of Transactions with Noncontrolling Interests) Subtotal Noncontrolling Interests (Note 26) Total BALANCES AT DECEMBER 31, 2012 P=4,933,027 P=963,867 P=13,578,086 P= P=601,055 (P=41,785) P=1,611,397 P=45,099 P=21,690,746 P=400,256 P=22,091,002 Net income (loss) 341, ,932 (29,537) 312,395 Other comprehensive income (loss): Items to be reclassified to profit or loss in subsequent periods: Unrealized loss on AFS financial assets - net of related deferred income tax (Note 11) (1,620,140) (1,620,140) (1,620,140) Realized loss on AFS financial assets due to impairment 1,006,508 1,006,508 1,006,508 Realized loss on sale of AFS financial assets 17,266 17,266 13,219 30,485 Gain on translation of foreign subsidiaries 66,901 66, , ,071 Items not to be reclassified to profit or loss in subsequent periods: Remeasurements of net defined benefit gains, net of tax 208, ,808 (1,137) 207,671 Total comprehensive income 550,740 (596,366) 66,901 21, , ,990 Increase in paid-in capital due to exercise of stock option and others (Note 27) 3,969 10,497 14,466 14,466 Increase in additional paid-in capital due to stock option plan (Note 27) 84,133 84,133 84,133 Increase in minority due to acquisition of Pitkin Petroleum Plc (PPP) (Note 4) 3,580,663 3,580,663 Appropriation during the year (Note 26) (10,000,000) 10,000,000 BALANCES AT DECEMBER 31, 2013 P=4,936,996 P=1,058,497 P=4,128,826 P=10,000,000 P=4,689 P=25,116 P=1,611,397 P=45,099 P=21,810,620 P=4,106,634 P=25,917,254

7 - 2 - Equity Attributable to Equity Holders of the Parent Company Net Capital Stock Additional Paid-In Retained Earnings (Note 26) Unrealized Gain (Loss) on AFS Financial Assets Equity Conversion Option Cumulative Translation Adjustments (Notes 21 Net Revaluation Surplus Effect of Transactions with Noncontrolling Noncontrolling Interests (Note 26) Capital Unappropriated Appropriated (Notes 11) (Note 14) and 25) (Note 4) Interests Subtotal (Note 26) Total BALANCES AT DECEMBER 31, 2013 P=4,936,996 P=1,058,497 P=4,128,826 P=10,000,000 P=4,689 P= P=25,116 P=1,611,397 P=45,099 P=21,810,620 P=4,106,634 P=25,917,254 Net income (loss) 1,005,552 1,005,552 (302,707) 702,845 Other comprehensive income (loss): Items to be reclassified to profit or loss in subsequent periods: Unrealized loss on AFS financial assets - net of related deferred income tax (Note 11) (68,699) (68,699) (68,699) Gain on translation of foreign subsidiaries 4,488 4,488 3,167 7,655 Items not to be reclassified to profit or loss in subsequent periods: Remeasurements of pension obligation, net of tax (Note 19) (27,283) (27,283) (755) (28,038) Gain on fair value of derivative 7,766 7,766 7,766 Total comprehensive income 978,269 (68,699) 12, ,824 (300,295) 621,529 Increase in paid-in capital due to exercise of stock option (Note 27) 3,403 33,322 36,725 36,725 Increase in additional paid-in capital due to stock option plan (Note 27) 25,808 25,808 25,808 Sale of PPC shares Share buyback transaction (Note 2) (26,274) (26,274) (364,129) (390,403) Equity conversion options (Note 14) 1,225,518 1,225,518 1,225,518 Declaration of cash dividends (Note 26) (395,063) (395,063) (395,063) BALANCES AT DECEMBER 31, 2014 P=4,940,399 P=1,117,627 P=4,712,032 P=10,000,000 (P=64,010) P=1,225,518 P=37,370 P=1,611,397 P=19,084 P=23,599,417 P=3,442,403 P=27,041,820

8 - 3 - Equity Attributable to Equity Holders of the Parent Company Net Capital Stock Additional Paid-In Retained Earnings (Note 26) Unrealized Gain (Loss) on AFS Financial Assets Equity Conversion Option Cumulative Translation Adjustments (Notes 21 Net Revaluation Surplus Effect of Transactions with Noncontrolling Noncontrolling Interests (Note 26) Capital Unappropriated Appropriated (Notes 11) (Note 14) and 25) (Note 4) Interests Subtotal (Note 26) Total BALANCES AT DECEMBER 31, 2014 P=4,940,399 P=1,117,627 P=4,712,032 P=10,000,000 (P=64,010) P=1,225,518 P=37,370 P=1,611,397 P=19,084 P=23,599,417 P=3,442,403 P=27,041,820 Net income (loss) 896, ,181 (120,546) 775,635 Other comprehensive income (loss): Items to be reclassified to profit or loss in subsequent periods: Unrealized loss on AFS financial assets - net of related deferred income tax (Note 11) (23,023) (23,023) (23,023) Reversal of fair value changes in AFS investment subsequently accounted for as an associate (Note 11) 193, , ,099 Realized gain on sale of AFS financial assets (Note 11) (107,088) (107,088)) (107,088)) Realized loss on fair value of hedging instruments (7,766) (7,766) (7,766) Gain on translation of foreign subsidiaries 94,730 94,730 52, ,278 Items not to be reclassified to profit or loss in subsequent periods: Remeasurements of pension obligation, net of tax (Note 19) (13,114) (13,114) (2,507) (15,621) Total comprehensive income 883,067 62,988 86,964 1,033,019 (70,505) 962,514 Increase in additional paid-in capital due to stock option plan (Note 27) 25,095 25,095 25,095 Share buyback transaction (Note 2) 4,080 4,080 (650,779) (646,699) Declaration of cash dividends (Note 26) (98,828) (98,828) (98,828) BALANCES AT DECEMBER 31, 2015 P=4,940,399 P=1,142,722 P=5,496,271 P=10,000,000 (P=1,022) P=1,225,518 P=124,334 P=1,611,397 P=23,164 P=24,562,783 P=2,721,119 P=27,283,902 See accompanying Notes to Consolidated Financial Statements.

9 PHILEX MINING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=1,142,231 P=1,054,282 P=1,075,052 Adjustments for: Depletion and depreciation (Note 18) 1,568,431 1,690,556 1,447,592 Gain on disposal of AFS financial assets (Note 11) (107,088) (26,867) Impairment loss on deferred exploration costs and others - net (Notes 7, 8, 10 and 13) 41, , ,934 Stock-based compensation expense (Note 27) 25,095 25,808 84,133 Share in net loss of an associate (Note 12) 13,200 Interest income (Note 6) (11,529) (16,952) (26,060) Interest expense (Notes 10 and 14) 354, ,360 Gain on disposal of property and equipment (Note 10) (764,685) Reorganization costs (Note 31) 394,154 Provision for rehabilitation, clean up and other costs (Notes 1 and 32) 161,400 Impairment loss on AFS financial assets (Note 11) 1,006,508 Gain on sale of subsidiaries (Note 1) (246,597) Unrealized foreign exchange losses and others - net 199,964 98, ,671 Operating income before working capital changes 2,871,522 3,406,328 4,568,126 Decrease (increase) in: Accounts receivable 156,711 (761,700) (63,279) Inventories (28,324) 810,054 (1,469,759) Pension assets 78,117 (101,370) (38,955) Other current assets (102,007) (33,496) (345,905) Increase (decrease) in: Accounts payable and accrued liabilities (258,443) (517,892) 1,216,999 Provisions and subscriptions payable (427,059) (316,160) (933,528) Pension obligation (45,175) 21,987 15,278 Cash generated from operations 2,245,342 2,507,751 2,948,977 Interest received 13,497 18,574 41,757 Interest paid (512,719) (352,474) (442,220) Income taxes paid (279,975) (385,680) (77,717) Net cash flows from operating activities 1,466,145 1,788,171 2,470,797 CASH FLOWS FROM INVESTING ACTIVITIES Increase in deferred exploration costs and other noncurrent assets (2,669,474) (3,477,330) (3,778,195) Additions to property, plant and equipment (Note 10) (1,389,710) (2,353,691) (2,309,854) Net proceeds from sale of: Property, plant and equipment 764,685 Subsidiaries 2,097,815 AFS financial assets 297, ,999 Share buyback of Pitkin (Note 1) (646,699) (395,734) Acquisition of additional interests in PPP (net of cash acquired; Notes 1 and 4) (629,953) Net cash flows used in investing activities (4,408,421) (5,462,070) (4,452,188) (Forward)

10 - 2 - Years Ended December CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Availment of short-term loans (Note 14) P=3,015,505 P=2,928,378 P=7,769,313 Exercise of stock options and others (Note 27) 36,725 14,467 Issuance of bonds - net of transaction costs 7,162,000 Payments of: Short-term bank loans (Note 14) (4,191,825) (4,880,022) (3,374,935) Long-term loans (55,014) Dividends (Note 26) (107,994) (366,894) (22,607) Net cash flows provided by (used in) financing activities (1,284,314) 4,825,173 4,386,238 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 3, ,123 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,223,206) 1,151,380 2,410,970 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,231,892 4,080,512 1,669,542 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 6) P=1,008,686 P=5,231,892 P=4,080,512 See accompanying Notes to Consolidated Financial Statements.

11 PHILEX MINING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Amounts Per Unit and Number of Shares) 1. Corporate Information, Business Operations and Authorization for Issuance of the Financial Statements Corporate Information Philex Mining Corporation and its subsidiaries are organized into two main business groupings: the metals business under Philex Mining Corporation, and the energy and hydrocarbon business under Philex Petroleum Corporation. Philex Mining Corporation (the Parent Company or PMC) was incorporated on July 19, 1955 in the Philippines and is listed in the Philippine Stock Exchange on November 23, Having reached the end of its 50 years corporate life, the Parent Company s Philippine Securities and Exchange Commission (SEC) registration was renewed on July 23, The Parent Company, Philex Gold Philippines, Inc. (PGPI, a wholly-owned subsidiary incorporated in the Philippines), Lascogon Mining Corporation (LMC), (a subsidiary of PGPI and incorporated in the Philippines), and Silangan Mindanao Exploration Co., Inc. (SMECI, a wholly-owned subsidiary directly by the Parent Company and incorporated in the Philippines) and its subsidiary, Silangan Mindanao Mining Co. Inc. (SMMCI, a wholly-owned subsidiary directly by the Parent Company and through SMECI, and incorporated in the Philippines) are all primarily engaged in large-scale exploration, development and utilization of mineral resources. The Parent Company operates the Padcal Mine in Benguet. PGPI operated the Bulawan mine in Negros Occidental until the second quarter of LMC conducts exploration work in Taganaan, Surigao del Norte. SMMCI owns the Silangan Project covering the Boyongan and Bayugo deposits. Philex Petroleum Corporation (PPC, a 64.7% owned subsidiary of the Parent Company and incorporated in the Philippines) and its subsidiaries: Forum Energy Plc (FEP, 58.2% owned and registered in England and Wales) and its subsidiaries, Pitkin Petroleum Plc. (PPP, 53.4% owned and incorporated and registered in United Kingdom of Great Britain and Northern Ireland) and its subsidiaries, and FEC Resources, Inc. (FEC, 51.2% owned and incorporated in Canada) are engaged primarily in oil and gas operation and exploration activities, holding participations in oil and gas production and exploration activities through their investee companies. The foregoing companies are collectively referred to as the Group (see Note 2) whose income is derived mainly from the Padcal Mine. Income from petroleum and coal and other sources are relatively insignificant. The Parent Company s registered business address is Philex Building, 27 Brixton Street, Pasig City, Metro Manila. Status of Business Operations Padcal Mine Operations The Parent Company has the Padcal Mine as its main source of revenue from its metals business segment. The Padcal Mine is on its 58th year of operation producing copper concentrates containing gold, copper and silver. On August 27, 2014, the Parent Company received an order from Mines and Geosciences Bureau (MGB) for the permanent lifting of the cease-and-desist order as the result of the Parent Company s compliance to its environmental obligations, such as payments of required fees, the carrying out of

12 - 2 - immediate remediation measures, and the submission of proof on the safety and integrity of its tailings dam. This followed the Parent Company s voluntary suspension of Padcal Mine operations after the Tailings Storage Facility (TSF) No. 3 incident in the mine arising from unabated and historically unprecedented heavy rains during the last two weeks of July 2012 from the two typhoons that brought unusual and heavy accumulation of rain water in TSF No. 3. The sealing of the underground tunnel in November 2012 allowed Padcal Mine to start conducting the necessary remediation and rehabilitation program (which included the rehabilitation of TSF No. 3 and the construction of an open spillway in place of the existing penstock system for water management, and the undertaking of remediation and rehabilitation measures in the areas affected by the tailings spill) relative to the resumption of its operations. On February 18, 2013, the Parent Company paid P=1,034,358 Mine Waste and Tailings Fee to MGB in connection with the TSF No. 3 as provided for under Department Administrative Order (DAO) No implementing the provisions of the Philippine Mining Act of In an Order dated February 25, 2013, the Pollution Adjudication Board (PAB) lifted its Cease and Desist Order dated November 28, 2012 effective for four months and imposed compliance on certain reportorial matters. On July 5, 2013, the MGB advised the Parent Company that it was authorized to continue implementing such remediation measures in the meantime that the former was thoroughly reviewing the pertinent technical details, subject to the Mineral Industry Coordinating Council s (MICC) guidance. On the same date, the PAB issued an Order extending the temporary lifting of the issued Cease and Desist Order issued last November 28, 2013 to allow the Parent Company to implement its Pollution Control Program. The Group s ability to continue as a going concern depends on the results of its exploration projects. The effect of these uncertainties will be reported in the consolidated financial statements as they become known and estimable. The Group continues to look for sources of funding to finance its exploration activities and working capital requirements. On December 18, 2014, SMECI and PMC (co-issuer) have issued convertible bonds amounting to P=7,200,000. The proceeds of the bonds were intended primarily to finance SMMCI s exploration activities and payment of its advances from the Parent Company (see Notes 14 and 24). PGPI PGPI operated the Bulawan mine in Negros Occidental from , when it was decommissioned due to unfavorable metal prices. The Bulawan mine currently has remaining resources of 23.9 million tonnes, including that of the Vista Alegre area. Exploration projects in the Vista Alegre area include the Nagtalay project and the Laburan/Skid 9 project, which have completed the geological modeling and preliminary resource estimation. PGPI is now looking for possible joint venture partners to explore further and operate the Bulawan and Vista Alegre projects. PGPI currently holds 98.9% of LMC. SMMCI SMMCI is currently conducting the definitive feasibility study of the Silangan Project covered by MPSA XIII following completion of its pre-feasibility study in late The Declaration of Mining Project Feasibility (DMPF) for underground mining operations was approved in April As of December 31, 2015, the Company is awaiting approval for the amended DMPF for open-pit mining operations. Adjacent to the Silangan deposits is the Kalayaan Project, the exploration of which is being undertaken by the Parent Company by virtue of a Farm-in Agreement with Kalayaan Gold & Copper Resources, Inc., a subsidiary of Manila Mining Corporation.

13 - 3 - PPC and its subsidiaries PPP, PPC and FEP, through its subsidiaries, has various participating interests in petroleum service contracts as follows: Participating Interest Service Contract Pitkin PPC FEP SC 6 (Cadlao Block) 1.65% SC 6A (Octon Block) 5.56% % 1 SC 6B (Bonita Block) 7.03% SC 14 (Tara PA) 10.00% SC 14 Block A (Nido) 8.47% SC 14 Block B (Matinloc) 12.41% SC 14 Block B-1 (North Matinloc) 19.46% SC 14 Block C (Galoc) 2.28% SC 14 Block C-2 (West Linapacan) 0.00% % SC 14 Block D (Retention Block) 8.17% SC 40 (North Cebu Block) % SC 53 (Mindoro) 70.00% 3 SC 72 (Reed Bank) 70.00% SC 74 Area 5 (Northwest Palawan) 70.00% SC 75 Area 4 (Northwest Palawan) 50.00% Peru Block XXVIII % Peru Block Z % 1 Both PPC and FEP's interest in SC 6A returned to 5.56% upon the approval by the DOE of the Deed of Assignment (DOA) entered into by Pitkin and the other consortium partners where the former re-assigns all of its participating interest to the remaining consortium partners which include PPC and FEP. 2 Pitkin s share in SC 14C2 decreased to 0.00% upon the termination of the Farm-In Agreement (FIA) between the Company and RMA. 3 On the letter dated 11 June 2015 to RMA, the DOE has revoked its approval of the DOA between Pitkin and RMA due to the latter s failure to comply with the requirements to prove its financial capability. With this, Pitkin s share reverted to its original participating interest of 70% in SC 53. FEP and its subsidiaries FEP s principal asset is a 70% interest in Service Contract (SC) 72 which covers an area of 8,800 square kilometers in the West Philippine Sea. FEP is scheduled to accomplish its second sub-phase of exploration activities from August 2011 to August However, due to maritime disputes between the Philippine and Chinese governments, exploration activities in the area are temporarily suspended as at December 31, FEP s SC 14C Galoc has completed its development of Galoc Phase 2 which increased the capacity of the field to produce from 4,500 barrels of oil per day (BOPD) to 12,000 BOPD in December PPP Pitkin is an international upstream oil and gas group, engaged primarily in the acquisition, exploration and development of oil and gas properties and the production of hydrocarbon products with operations in the Philippines and Peru. Pitkin s principal asset is 25% interest in Peru Block Z-38.

14 - 4 - On July 16, 2013 and October 25, 2013, Pitkin completed the sale of all its interests in its whollyowned subsidiaries, Vietnam American Exploration Company LLC (Vamex) with a 25% participating interest in both Vietnam Block 07/03 and Lonsdale, Inc. The gain on sale of these subsidiaries amounted to P=246,597. Accordingly, goodwill attributable to Vietnam Block 07/03 at time of acquisition of Pitkin by PPC was derecognized amounting to P=554,178. PPC On April 5, 2013, PPC increased its shareholding in Pitkin Petroleum Plc (Pitkin) from 18.46% to 50.28% through subscription of 10,000,000 new ordinary shares and purchase of 36,405,000 shares from existing shareholders at US$0.75 per share. The transaction led to PPC obtaining control over Pitkin. Pitkin was incorporated and registered in the United Kingdom (UK) of Great Britain and Northern Ireland on April 6, On July 2, 2014, PPC surrendered 2,000,000 of its shares held in Pitkin following the latter s tender offer to buy back 11,972,500 shares equivalent to 8.55% of all shares outstanding as of that date for a consideration of US$1 per share. Pitkin received a total of 11,099,000 shares surrendered from its existing shareholders. The share buyback transaction caused an increase in PPC s ownership in Pitkin from 50.3% to 53.1% as at July 2, In May 2015, PPP tendered another offer to buy back its outstanding shares. PPC and the noncontrolling interests surrendered 21,373,000 shares and 19,499,500 shares, respectively. Following this transaction, PPC s interest in PPP has increased from 53.1% to 53.4%. Recovery of Deferred Mine and Oil Exploration Costs The Group s ability to realize its deferred mine and oil exploration costs amounting to P=28,963,295 and P=25,366,569 as at December 31, 2015 and 2014, respectively (see Note 13), depends on the success of exploration and development work in proving the viability of its mining and oil properties to produce minerals and oil in commercial quantities, and the success of converting the Group s EPs or EPAs or APSAs to new mineral agreements, which cannot be determined at this time. The consolidated financial statements do not include any adjustment that might result from these uncertainties. Authorization for Issuance of the Financial Statements The consolidated financial statements are authorized for issuance by the Parent Company s Board of Directors (BOD) on February 24, Summary of Significant Accounting Policies and Financial Reporting Practices Basis of Preparation The consolidated financial statements of the Group have been prepared using the historical cost basis, except for mine products inventories that are measured at net realizable value (NRV), and for AFS financial assets and derivative financial instruments that are measured at fair value. The consolidated financial statements are presented in Philippine Peso (Peso), which is the Parent Company s functional and reporting currency, rounded to the nearest thousands, except when otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the Philippines. The Group prepared its consolidated financial statements in accordance with Philippine Financial Reporting Standards (PFRS), except for the Parent Company s mine products inventories that are measured at NRV, which was permitted

15 - 5 - by the Philippine SEC. The significant accounting policies followed by the Group are disclosed below. Changes in Accounting Policies and Disclosures The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, The adoption of these amendments did not have any significant impact on the financial statements. Amendments to Philippine Accounting Standards (PAS) 19, Defined benefit Plans: Employee Contributions Annual Improvements to PFRSs Cycle o PFRS 2, Share-based Payment - Definition of Vesting Condition o PFRS 3, Business Combinations - Accounting for Contingent Considerations in a Business Combination o PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments Assets to the Entity s Assets o PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Revaluation Method - Proportionate Restatement of Accumulated Depreciation and Amortization o PAS 24, Related Party Disclosures - Key Management Personnel Annual Improvements to PFRSs Cycle o PFRS 3, Business Combinations - Scope Exceptions for Joint Arrangements o PFRS 13, Fair Value Measurement - Portfolio Exception o PAS 40, Investment Property Future Changes in Accounting Policies The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements are listed below. The Group intends to adopt these standards when they become effective. Adoption of these standards and interpretations are not expected to have any significant impact on the financial statements of the Group. No definite adoption date prescribed by the SEC and Financial Reporting Standards Council (FRSC) Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate Effective January 1, 2016 PFRS 10, Consolidated Financial Statements, and PAS 28, Investments in Associates and joint Ventures - Investment entities: Applying the Consolidation Exception (Amendments) PAS 27, Separate Financial Statement - Equity Method in Separate Financial Statements (Amendments) PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests (Amendments) PAS 1, Presentation of Financial Statements - Disclosure Initiative (Amendments) PAS 14, Regulatory Deferral Accounts PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Clarification of Acceptable Methods of Depreciation and Amortization (Amendments Annual Improvements to PFRSs ( cycle) o PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - Changes in Methods of Disposal o PFRS 7, Financial Instruments: Disclosures - Servicing Contracts o PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements

16 - 6 - o PAS 19, Employee benefits - Regional market issue regarding discount rate o PAS 34, Interim Financial Reporting - Disclosure information elsewhere in the interim financial report Effective January 1, 2018 PFRS 9, Financial Instruments In addition, to International Accounting Standards Board has issued the following new standards that have not yet been adopted locally by the SEC and FRSC. The Group is currently assessing the impact of these new standards and plants to adopt them on their required effective dates once adopted locally. International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers (effective January 1, 2018) IFRS 16, Leases (effective January 1, 2019) Summary of Significant Accounting Policies Presentation of Financial Statements The Group has elected to present all items of recognized income and expenses in two statements: a statement displaying components of profit or loss in the consolidated statement of income and a second statement beginning with profit or loss and displaying components of other comprehensive income (OCI) in the consolidated statement of comprehensive income. Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries as at December 31, 2015 and Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee), Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee, Rights arising from other contractual arrangements, The Group s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries

17 - 7 - to bring their accounting policies into line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interests Derecognizes the cumulative translation differences recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognized in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. The Parent Company s subsidiaries and their respective natures of businesses are as follows: Subsidiaries Philex Gold Holdings, Inc. (PGHI) Philex Gold Inc. (PGI) PGPI LMC SMECI SMMCI PPC Nature and Principal Place of Business Incorporated in the Philippines on August 28, 1996 to serve as an intermediary holding company through which its subsidiaries and the Parent Company conduct large-scale exploration, development and utilization of mineral resources. PGHI owned 100% of the outstanding shares of PGPI effective April 27, In 2015, PGHI sold 100% of its ownership in PGPI to the Parent Company. Incorporated in Canada on June 14, 1996 and owned 100% of the outstanding shares of PGPI until April 26, Incorporated in the Philippines on August 9, 1996 as a wholly-owned subsidiary of PGI and became a wholly-owned subsidiary of PGHI on April 27, In 2015, PGPI was acquired and 100% owned by the Parent Company. PGPI was primarily engaged in the operation of the Bulawan mine and the development of the Sibutad Project both on care and maintenance status since PGPI currently owns 98.9% of the outstanding shares of LMC. Incorporated in the Philippines on October 20, 2005 to engage in exploration, development and utilization of mineral resources, particularly the Lascogon Project in Surigao. Incorporated in the Philippines on October 12, 1999 primarily to engage in the business of large-scale exploration, development and utilization of mineral resources; currently the holding company of SMMCI. Incorporated in the Philippines on January 4, 2000 primarily to engage in the business of large-scale exploration, development and utilization of mineral resources, principally the Silangan Project. Incorporated in the Philippines on December 27, 2007 to carry on businesses related to any and all kinds of petroleum and petroleum products, oil, and other sources of energy. PPC s shares are listed in the Philippine Stock Exchange.

18 - 8 - Subsidiaries FEP FEC BEMC PPP Fidelity Stock Transfers, Inc. (FSTI) Philex Land, Inc. (PLI) Philex Insurance Agency, Inc. (PIAI) Nature and Principal Place of Business Incorporated on April 1, 2005 in England and Wales primarily to engage in the business of oil and gas exploration and production, with focus on the Philippines. FEP shares were delisted in the Alternative Investment Market of the London Stock Exchange in Incorporated on February 8, 1982 under the laws of Alberta, Canada primarily to engage in the business of exploration and development of oil and gas and other mineral related opportunities. Incorporated in the Philippines on July 19, 2005 to engage in exploration, development and utilization of energy-related resources, particularly the Brixton coal operations in Diplahan, Zamboanga Sibugay. On September 1, 2013, BEMC announced the closure of its coal mine in Diplahan, Zamboanga Sibugay. On January 6, 2014, BEMC has finalized the agreement for the assignment of COC 130 to Grace Coal Mining and Development Inc. (GCMDI). On May 12, 2015, the DOE has approved the assignment completing the transfer of COC 130 from BEMC to GCMDI. Incorporated and registered in United Kingdom (UK) of Great Britain and Northern Ireland on April 6, 2005 and is engaged primarily in the acquisition, exploration and development of oil and gas properties and the production of hydrocarbon products. PPP registered its Philippine Branch, Pitkin Petroleum (Philippines) Plc, on March 19, 2008 and is presently engaged in the exploration of oil and gas assets in the Philippine territories. Incorporated in the Philippines on December 28, 1981 to act as a stock transfer agent and/or registrar of client corporations. The company is currently in dormant status. Incorporated in the Philippines on February 26, 2007 to own, use, develop, subdivide, sell, exchange, lease, and hold for investment or otherwise, real estate of all kinds including buildings, houses, apartments and other structures. The company is currently in dormant status. Incorporated in the Philippines on May 20, 1987 to act as a general agent for and in behalf of any domestic and/or foreign non-life insurance company or companies authorized to do business in the Philippines. PIAI is currently in dormant status. Also included as part of the Parent Company s subsidiaries are those intermediary entities which are basically holding companies established for the operating entities mentioned above. The following are the intermediary entities of the Group: Forum Philippine Holdings Limited (FPHL), Forum FEI Limited (FFEIL), Pitkin Peru LLC (PPR), Pitkin Petroleum Peru 2 LLC (PP2) and Pitkin Petroleum Peru 3 LLC (PP3).

19 - 9 - The ownership of the Parent Company and subsidiaries over the foregoing companies in 2015 and 2014 are summarized as follows: Percentages of Ownership Direct Indirect Direct Indirect PGHI PGI PGPI LMC 98.9 PGPI LMC 98.9 PPC BEMC FEP and subsidiaries FEC LMC FEP PPP SMECI SMMCI FSTI PLI PIAI Sale of PPC shares In 2015, PMC sold 839,100 share of PPC to third parties. The resulting sale of share decreased the ownership of the Parent Company in PPC from 64.8% to 64.7%. Infusion of additional capital of PMC in SMECI On February 3, 2015, by virtue of SMECI s BOD and by the vote of the stockholders representing at least two-thirds of the outstanding capital stock, SMECI s Articles of Incorporation were amended to increase its authorized capital stock from 170,000 shares with par value of P=10,000 per share to 1,000,000 shares also with a par value of P=10,000 per share. On February 10, 2015, PMC subscribed 500,000 shares out of the 830,000 new shares for an aggregate price of P=7,207,500. Acquisition of additional shares of PPP On July 2, 2014, PPC surrendered 2,000,000 of its shares held in PPP following the latter s tender offer to buy back 11,972,500 shares equivalent to 8.55% of all shares outstanding as of that date for a consideration of US$1 per share. PPP received a total of 11,099,000 shares surrendered from its existing shareholders. The share buyback transaction resulted to an increase in PPC s ownership in PPP from 50.3% to 53.1%. In May 2015, PPP tendered another offer to buy back its outstanding shares. PPC and the noncontrolling interests surrendered 21,373,000 shares and 19,499,500 shares, respectively. Following this transaction, PPC s interest in PPP has increased from 53.1% to 53.4%. Acquisition of additional investment in FEP In June and November 2015, PPC purchased additional investment from the non-controlling shareholders of FEP. The transaction resulted in increase in ownership of PPC over FEP from 36.4% to 48.8%.

20 NCI NCI represents interest in a subsidiary that is not owned, directly or indirectly, by the Parent Company. Profit or loss and each component of OCI (loss) are attributed to the equity holders of the Parent Company and to the NCI. Total comprehensive income (loss) is attributed to the equity holders of the Parent Company and to the NCI even if this results in the NCI having a deficit balance. NCI represents the portion of profit or loss and the net assets not held by the Group. Transactions with NCI are accounted for as an equity transaction. Interest in Joint Arrangements PFRS defines a joint arrangement as an arrangement over which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (being those that significantly affect the returns of the arrangement) require unanimous consent of the parties sharing control. Joint operations A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to the arrangement. In relation to its interests in joint operations, the Group recognises its: Assets, including its share of any assets held jointly Liabilities, including its share of any liabilities incurred jointly Revenue from the sale of its share of the output arising from the joint operation Share of the revenue from the sale of the output by the joint operation Expenses, including its share of any expenses incurred jointly Business Combination and Goodwill Business combinations, except for business combination between entities under common control, are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any NCI in the acquiree. For each business combination, the acquirer measures the NCI in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition-related costs incurred are expensed and included in general and administrative expenses. When the Group acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date and any gain or loss on remeasurement is recognized in the consolidated statement of income. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in the consolidated statement of income, or in the consolidated statement of comprehensive income. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.

21 Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for NCI over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units (CGUs) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the CGU or group of CGUs to which the goodwill relates. Where the recoverable amount of the CGU or group of CGUs is less than the carrying amount of the CGU or group of CGUs to which goodwill has been allocated, an impairment loss is recognized in the consolidated statement of income. Impairment losses relating to goodwill cannot be reversed in future periods. The Group performs its impairment test of goodwill annually every December 31. Foreign Currency Translation of Foreign Operations Each subsidiary in the Group determines its own functional currency and items included in the consolidated financial statement of each subsidiary are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate on the date of the transaction. Outstanding monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at consolidated statement of financial position date. All exchange differences are recognized in consolidated statements of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. For purposes of consolidation, the financial statements of FEP, PPP and PGI, which are expressed in United States of America (US) dollar amounts and the financial statements of FEC, which are expressed in Canadian (Cdn) dollar amounts, have been translated to Peso amounts as follows: a. assets and liabilities for each statement of financial position presented (i.e., including comparatives) are translated at the closing rate at the date of the consolidated statement of financial position; b. income and expenses for each statement of income (i.e., including comparatives) are translated at exchange rates at the average monthly prevailing rates for the year; and c. all resulting exchange differences are taken in the consolidated statement of comprehensive income.